Federal Reserve seen taking a step toward March rate increase

FILE PHOTO: Federal Reserve Chair Jerome Powell testifies before the Senate Banking Committee hearing on "The Quarterly CARES Act Report to Congress" on Capitol Hill in Washington, U.S., December 1, 2020. Susan Walsh/Pool via REUTERS/File Photo

NEW YORK: Jerome Powell (pic) and his fellow Federal Reserve (Fed) policymakers are expected to signal their first interest-rate hike since 2018, paving the way for a March move as the United States central bank tries to extinguish red-hot inflation.

Financial markets in the coming week will get another read on US inflationary developments when the government issues employment cost data for the fourth quarter.

Economists project another solid increase in wages and benefits after the index jumped by a record 1.3% in the prior three months.

A separate report is expected to show that US economic growth accelerated at the end of 2021 after a mediocre third-quarter performance, fuelled mostly by a pickup in inventories and a modest gain in consumer spending.

Powell and his colleagues have hastened their withdrawal of pandemic support in a hawkish pivot to control price pressures, even as the Omicron variant of Covid-19 has hampered economic activity in the early weeks of the new year.

Economists expect them to conclude the Fed’s bond-buying programme on schedule in March, and also raise rates from near zero at their meeting that month.

Some say that an aggressive half-percentage-point hike is warranted to bolster the central bank’s inflation-fighting credentials.

Elsewhere, the International Monetary Fund publishes its latest outlook, which the organisation has warned will see downgrades of previous projections for global growth because of the late-2021 resurgence of the coronavirus.

The Bank of Canada may start a year-long hiking cycle to bring three-decade-high inflation under control, and its counterparts in South Africa, Hungary, Colombia and Chile are predicted to raise rates too.

Gross domestic product (GDP) readings on Friday from Germany, France and Spain will show how badly the Omicron variant hit the recovery in the fourth quarter.

Germany is certain to have contracted, setting Europe’s biggest economy up for a recession. The other two are expected to still be growing, yet at a slower pace than in the previous three months.

Meanwhile, economic confidence and Purchasing Managers’ Index (PMI) data will provide an early indication if the eurozone picked up this month or remained subdued. GDP and inflation readings for the region are due the following week.

Hungary holds its monthly rate decision tomorrow, followed two days later by a weekly rate decision. Markets are expecting the central bank to provide more clarity on how policymakers weigh a rally in the currency against a bleaker inflation outlook.

It will be a busy week for African central banks, with five institutions gathering for their first rate meetings of the year. Nigeria, Mozambique, Kenya and Angola are all predicted to stand pat.

In contrast, South Africa is likely to raise borrowing costs, sticking to the aggressive rate-hike trajectory that its modelling shows, after inflation moved closer to the top of its target range last month.

Kuwait is expected to unveil its budget, which should show a narrower deficit thanks to higher oil prices, and a cut in spending as the government aims to tighten its belt through the slow pandemic recovery.

South Korea releases growth figures tomorrow that are likely to show the economy expanded at a faster pace in the fourth quarter, helped by continued strength in exports and an improvement in private consumption before the onset of Omicron. — Bloomberg

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